Mitch’s Markets, Inc., operates three stores in a large metropolitan area. The c
ID: 2449481 • Letter: M
Question
Mitch’s Markets, Inc., operates three stores in a large metropolitan area. The company’s segmented absorption costing income statement for the last quarter is given below:
Mitch’s Markets, Inc.
Income Statement
For the Quarter Ended March 31
Total
Uptown
Store
Downtown
Store
West Loop
Store
Sales
$
2,700,000
$
1,000,000
$
600,000
$
1,100,000
Cost of goods sold
1,484,000
560,000
359,000
565,000
Gross margin
1,216,000
440,000
241,000
535,000
Selling and administrative expenses:
Selling expenses:
Direct advertising
121,300
37,000
42,000
42,300
General advertising*
19,000
7,037
4,222
7,741
Sales salaries
152,000
47,000
42,000
63,000
Delivery salaries
33,000
11,000
11,000
11,000
Store rent
203,000
67,000
63,000
73,000
Depreciation of store fixtures
46,360
17,800
8,700
19,860
Depreciation of delivery equipment
27,000
9,000
9,000
9,000
Total selling expenses
601,660
195,837
179,922
225,901
Administrative expenses:
Store management salaries
77,000
24,000
24,000
29,000
General office salaries*
47,000
17,407
10,444
19,149
Utilities
94,600
31,000
32,000
31,600
Insurance on fixtures and inventory
24,900
7,800
8,800
8,300
Employment taxes
36,300
11,100
12,200
13,000
General office expenses—other*
22,000
8,148
4,889
8,963
Total administrative expenses
301,800
99,455
92,333
110,012
Total operating expenses
903,460
295,292
272,255
335,913
Net operating income (loss)
$
312,540
$
144,708
$
(31,255)
$
199,087
*Allocated on the basis of sales dollars.
Management is very concerned about the Downtown Store’s inability to show a profit, and consideration is being given to closing the store. The company has asked you to make a recommendation as to what course of action should be taken. The following additional information is available about the store:
a.
The manager of the store has been with the company for many years; he would be retained and transferred to another position in the company if the store were closed. His salary is $8,000 per month, or $24,000 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of $7,000 per month.
b.
The lease on the building housing the Downtown Store can be broken with no penalty.
c.
The fixtures being used in the Downtown Store would be transferred to the other two stores if the Downtown Store were closed.
d.
The company’s employment taxes are 15% of salaries.
e.
A single delivery crew serves all three stores. One delivery person could be discharged if the Downtown Store were closed; this person’s salary amounts to $9,500 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but it does eventually become obsolete.
f.
One-third of the Downtown Store’s insurance relates to its fixtures.
g.
The general office salaries and other expenses relate to the general management of Mitch’s Markets, Inc. The employee in the general office who is responsible for the Downtown Store would be discharged if the store were closed. This employee’s compensation amounts to $9,000 per quarter.
Required:
1.
Prepare a schedule showing the change in revenues and expenses and the impact on the overall company net operating income that would result if the Downtown Store were closed. (Decreases should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)
2.
Based on your computations in requirement (1) above, what recommendation would you make to the management of Mitch’s Markets, Inc.?
The Downtown Store should be closed.
The Downtown Store should not be closed.
3.
Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $400,000 per quarter due to loyal customers shifting their buying to the Uptown Store. The Uptown Store has ample capacity to handle the increased sales, and its gross margin is 44% of sales.
Calculate the Net advantage of closing the Downtown Store.
Mitch’s Markets, Inc., operates three stores in a large metropolitan area. The company’s segmented absorption costing income statement for the last quarter is given below:
Explanation / Answer
Answer 1 All Stores (Amounts in $) Existing On Scenario Closure of downtown store Sales 2700000 2100000 Sale of Downtown store removed Cost of goods sold 1484000 1125000 COGS of Downtown store removed Gross margin 1216000 975000 Selling and administrative expenses: Selling expenses: Direct advertising 121300 79300 General advertising* 19000 14778 Sales salaries 152000 110000 Delivery salaries 33000 23500 One delivery person discharged ; salary $ 9,500 per quarter Store rent 203000 140000 Depreciation of store fixtures 46360 46360 Fixtures trfd to other stores ; hence depreciation remains constant Depreciation of delivery equipment 27000 18000 Total selling expenses 601660 431938 Administrative expenses: Store management salaries 77000 77000 The cost would only be reduced by 3000 $ if the store is kept open General office salaries* 47000 38000 Only salary of discharged employee taken out Utilities 94600 62600 Insurance on fixtures and inventory 24900 21967 Employment taxes 36300 33525 General office expenses—other* 22000 17111 Total administrative expenses 301800 250203 Total operating expenses 903460 682141 Net operating income (loss) 312540 292859 Answer 2. Based on the workings given above, the recommendation would be to continue the downtown store since if the same is closed, the net operating income for the Company as a whole reduces by $ 19,681. Answer 3. In case the downtown store is closed, the uptown store sales would increase by $ 400,000 and gross margin thereagainst is 44% of sales So, the increase in the net operating income as shown above (upon closure of the downtown store) would increase by $ 400,000 X 44% = $ 176,000. The total income for Mitch's Markets Inc in such a scenario would be $ 468,859 against an earlier net operating income of $ 312,540, thereby leading to a net advantage of $ 156,319 on closing the downtown store. This is assuming that the other costs as mentioned in the second scenario of the solution to part 1 remain constant.